Monday, February 6, 2023

Deakin expects Lula to freeze Petrobras divestments, sell domestic fuels below world market price

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Luiz Inácio Lula da Silva has won Brazil’s presidential election.

Following the transfer of power in Brazil, Latin America’s largest democracy, myriad reforms are expected in the energy sector. Arthur Deakin, analyst and Director for Americas Market Intelligence (AMI) Energy Practice, said these expected reforms could put Petrobras, the state oil producer, in a less profitable position.

Deakin said the divestment of state-owned energy assets will freeze, but concluded privatisations are not expected to be reversed, as that would be costly.

“Agreements that have not yet been finalised, such as the sales of the three Petrobras’ refineries (Reman-AM, SIX-PR and Lubnor- CE) that were expected to close by the end of the year, could be renegotiated,” he said.

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The analyst also expects the Lula administration to seek to facilitate lower energy prices by adopting a different pricing policy.

“Although Petrobras and its competitors mainly operate in Brazil, most of the machinery and distillates used to extract and process the country’s crude are imported in USD, tying costs to global benchmarks,” Deakin said.

The analyst posited that this expected policy, if implemented, would be a recipe for billions of dollars in losses for Petrobras and other crude distributors like Vibra Energia.

Deakin explained that the leading candidate for the Petrobras chief executive officer (CEO) position, Senator Jean Paul Prates had proposed the creation of a new reference price which would not be mandatory. This could be the new pricing policy adopted by Lula’s administration. The analyst said Prates worked on Lula’s energy plan for the upcoming administration.

Despite the unenforceability of the reference price, Deakin expects that market forces will require sellers to abide by it to compete with other local suppliers, and this will result in fuel sales at a loss, especially if it does not match global benchmarks.

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“Under the presidency of Lula’s successor, Dilma Rousseff, price controls on diesel and fuel sold locally turned Petrobras into the most indebted oil company in the world,” Deakin said. “In fact, it is estimated that the company lost USD 40bn in revenue under this scheme from 2011 to 2014.”

Petrobras is also expected to invest more in refineries, natural gas, biofuel, fertiliser and renewable assets. He said offshore wind and production of biofuels, in particular, will become a key part of Petrobras’ transition.

Deakin pointed out that Prates had also indicated that state-owned companies will be more involved with the private sector through partnerships, and that the growing presence of state-owned companies may come at the expense of private refineries and independent power producers, reflected by an 8.5% drop in Petrobras’ stock the day after the elections.

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